Several years of decline in the South African steel industry will come to an end by way of a moderate recovery in steel production over the coming years, forecasts global professional services firm KPMG industrial, automotive and pharmaceutical director Anthony Berrange.

However, he says investments needed to substantially improve the industry are unlikely to materialise because business confidence in the South African economy decreased in 2012.

Berrange estimates that the South African industry is worth more than R26-billion and expects the domestic demand for steel to be driven by the automotive sector.

This will offset a slowing construction sector that has a mixed steel-demand outlook.

“Government’s announcement last year of the roll-out of R4-trillion worth of infra- structure development projects over the next 14 years will not change the outlook of the country’s construction sector. The 14-year plan details that still need to be addressed are regulatory and funding constraints that continue to block South Africa’s infrastructure potential,” highlights Berrange.

However, he says government’s plan to spend R800-billion on infrastructure up to 2014 will have a positive impact on the steel and construction industries and using figures provided by State-owned enterprises, more than 2.5-million tons of steel have been absorbed so far and will be used in the programme until 2015.

Most of this steel use is attributed to State-owned power utility Eskom’s Medupi and Kusile power stations, followed by the requirements of the country’s rail network, freight logistics group Transnet and the Department of Water Affairs’ dam-building projects.

The majority of transport infrastructure projects will be completed by 2014 but there will be some demand from Eskom through to 2020.
KPMG expects that higher spending from the private sector will off-set government’s expenditure when it slows down.

“Despite a slow return to positive territory, with a real construction industry growth expectation of 3.6% for 2013, the risks are still plentiful. They include policy uncertainty, intense credit-rating pressure and clashes in relation to several strikes at mines across the country,” Berrange states.

He also says the South African steel industry will continue to be pressurised by persistently low output prices over the coming quarters, but is cautiously optimistic that steel prices will improve this year.

Berrange attributes this to increased demand from infrastructure developers in China, a stabilisation in the eurozone’s economic activity and the continued market recovery of the US housing sector.

However, the global steel market will remain constrained as a result of overcapacity in the upcoming quarters, with low steel prices required to gradually encourage the rebalancing of the industry.

But Berrange believes that this will be disrupted by the Chinese government’s support for State-owned enterprises, which will prevent lossmaking steel mills from having to make drastic production cuts.

Further, rising steel exports from China will put pressure on European, Asian and possibly North American markets.

Domestically, consumption growth is expected to exceed production, resulting in reduced steel surplus, while investment in production facilities will be constrained by persistently low output prices, rising energy costs because of Eskom’s price hikes and aggressive wage negotiations by unions.

“KPMG also expects steel and mining company ArcelorMittal South Africa, which has an output of 7.1-million tons of liquid steel a year according to its website, to hold back on more ambitious output expansion, as a result of persistently weak margins and an uncertain investment climate,” Berrange notes.

“However, if steel production costs are controlled, this will be an attractive market for investors,” he concludes.

Mining Weekly reported in January that South Africa would have to entice investors with incentives, such as tax rebates and manufacturing competitiveness enhancement programmes, to secure foreign direct investment for the production sectors, especially the value-added manufacturing sectors.

The Department of Trade and Industry acting deputy director-general responsible for industrial development Garth Strachan pointed out, at the time, that steel comprises the most significant input into a wide range of manufactured and value-added products.

“The steel input into products is as much as 70% in many sectors. However, owing to South Africa having near monopolies practising input parity pricing, what should be an advantage becomes a disadvantage, as steel, which arises from iron-ore value-addition, is available to South African producers at the same price as to international buyers,” he explained.

Meanwhile, Iron Mineral Beneficiation Services CEO John Beachy Head, who also spoke to Mining Weekly in Johannesburg, agreed that there was an anomaly with regard to the iron and steel value chain.

“Mining companies taking the ore out of the ground are making money, while companies manufacturing steel products are struggling,” he said.

At its fifty-third national elective conference, in Mangaung, in December, the African National Congress stated that there would be a focus on mineral bene- ficiation and social upliftment.

Beachy Head noted that South Africa was in an ideal position to become a leader in iron beneficiation or iron making, as it is relatively unsophisticated and not highly capital intensive.

“South Africa has the opportunity to become a specific niche leader in this field,” he said.

The first critical objective to achieve higher levels of beneficiation would be included in the amendment to the Mineral and Petroleum Resources Development Act (MPRDA), which would secure the setting aside of a proportion of strategic minerals for local manufacturing at a discounted price and with strong conditionalities, Strachan explained.

“Steelmaking companies would, through this, not be able to receive a discounted iron-ore price and not pass it on as a discounted steel price to the steel-product manufacturer, which has in many respects, been happening. Companies are often tempted not to pass on the discounted price, but rather to use it to increase their profits, which is not in the national interest.”